Stabilization, Adjustment, and Growth Prospects in Transition Economies

Abstract

Political change marked the difference between the approaches of the countries of Eastern Europe and the former Soviet Union (FSU). The Baltics and most Eastern European countries wanted to break away from communism and the FSU domination--so their transition was characterized first by political change. Communists were discredited and removed from power, creating a period ofextraordinary politicsand a window of opportunity for reform. The collapse of the FSU did not lead to political change in most FSU states. There were indications of discontent with the Union, but except for the Baltics these were not as strong as in the Eastern European countries and there were no explicit demands for independence. The former communists hoped that the Commonwealth of Independent States (CIS) set up after the collapse of the FSU would evolve into a loose federation maintaining old trade and financial links. Many FSU countries avoided policies different from Russia's. Most political leaders did not initially think that they would need structural reform policies which could diverge from Russian policies. The pace of reform quickened only after the collapse of the ruble zone in the FSU in 1993. Knowing where to go helped shape reform. The Eastern European and Baltic countries, wanting to join the European Union and encouraged to do so, first initiated political reform, which led to economic reform. Most FSU countries, not knowing with whom to align, initially saw no choice but the Russian Federation. Once reforms are launched, the outcomes are quite similar. Growth starts about two full years after stabilization, although it took about a year longer in the FSU. Initial conditions are important to the transition. Short to medium-term prospects seem most favorable to Eastern Europe and the Baltics, although they still have to catch up with the OECD countries. If admitted to the European Union, they may attain high growth rates even in the longer term. The FSU countries have even more catching up to do. In the short to medium-term, countries with slower population growth rates and strong reform efforts should enjoy rapid per capita growth. The Central Asian countries, with their high population growth rates, need economic growth rates faster than their population growth rates. This leaves little room for slowing reform. Given the benefits of integration, there is a strong case for Central Asian countries pushing for an economic union, which would also facilitate the restructuring of their economies.